Please tell my why this particular strategy won't work!

Educate

Building Trust
Entrepreneur
Sorry, but I don't see anyone actually giving me the law I asked. CFC rules is something really vague. Can you point out which law is it? Because I know Common Reporting Standard and Automatic Exchange of Information law, but I am first time hearing of CFC.

People did not give me answer where can I read of this CFC law. I tried googling, but no results, so my question is legit.

Are you going to try this setup ? BTW why you want to "loan" the money from offshore company A to company B ? What happen if company B default on a loan ?
Because if it is a loan you don't have to pay taxes on it. Company B can default on loan (aka you) and then Company A will have losses, no? Even better.
 

Educate

Building Trust
Entrepreneur
That is CRS. Common Reporting Standard. So is that the same as CFC? So far as what I see is that CRS says member states have to REPORT companies to beneficiary states. But it doesn't explicitly say you can't hold two companies in different countries. I am aware the company would get reported as per CRS. But legally, it isn't actually illegal to have a company in another country where taxes are 0% if you don't withdraw that money to local country. Maybe that is operating capital. So your tax man will say "hey you are beneficiary of this company in BVI that has 100000000$ in bank", OK, but according to that legally you don't have to pay tax unless you withdraw those dividends to your personal bank accounts locally or overseas, right? As long as its companies money and it is taxed in incorporation jurisdiction at 0% you don't have to pay tax right?

So should you withdraw dividends? Well, then you pay income tax. But what if you take a loan from that company? Then you don't pay income tax, because loan is not an income, right? Why is this illegal? And if it is - which law states it? Would really like to know.
 

Nyep

Building Trust
Entrepreneur
It's pretty hard to believe someone can actually be this stupid and/or this crap at googling. You must be a troll.
Here, eat from this spoon, troll. In the slim case you are not a troll, I doubt you'll be able to understand it or research it further though, considering the level of self-help you've been demonstrating thus far.

Good luck regardless.
 

Educate

Building Trust
Entrepreneur
It's pretty hard to believe someone can actually be this stupid and/or this crap at googling. You must be a troll.
Here, eat from this spoon, troll. In the slim case you are not a troll, I doubt you'll be able to understand it or research it further though, considering the level of self-help you've been demonstrating thus far.

Good luck regardless.
Sorry, first of all, what's with the ad hominem.
Secondly, that is wikipedia, not the actual law that you linked.
Yes, I read that and its vague, where is the law and paragraph.
Also, that Wikipedia article does not include my country. It includes: US, UK, India, Germany.

Why people get angry instead of just admitting "Yeah, I guess I can't pin-point out the exact law".
 

Reboot

Building Trust
Entrepreneur
Sorry, first of all, what's with the ad hominem.
Secondly, that is wikipedia, not the actual law that you linked.
Yes, I read that and its vague, where is the law and paragraph.
Also, that Wikipedia article does not include my country. It includes: US, UK, India, Germany.

Why people get angry instead of just admitting "Yeah, I guess I can't pin-point out the exact law".
You didn't say what country you are...................;)
 

Martin Everson

Offshore Consultant
Business Angel
People did not give me answer where can I read of this CFC law.
CFC laws are tied to your specific country. However earlier you refuse to say which country your are from. How can someone then determine a specific law that applies to you if they do not know where you live? It's like asking the price of a loaf of bread but refusing to give details on where you want to buy it. How can you get a useful answer :(. I am sure you will get more use from peoples answers in this forum by seeking some urgent help to improve your basic cognitive ability firstly thu&¤#.

p.s you can work out yourself the CFC stuff that applies to you with just google if you don't wish to reveal your country. CFC rules are not uniform across countries and some countries may tax you regardless of dividends drawn etc as the entity maybe considered transparent (as if you earned it personally directly) for tax purposes.
 

dxt3r

New Member
So which are international CFC laws?
They OECD has a tax model, it "recomends it" to countries, countries that want to play ball with the OECD to be part of G20 and other nonsense, comply and reform their laws to adopt their standards.

CFC rules (controlled foreign company) states that if you have transactions with the foreign company you control it is deemed non-deductible as an expense or subject to some sort of tax withholding.
 

dxt3r

New Member
Sorry, first of all, what's with the ad hominem.
Secondly, that is wikipedia, not the actual law that you linked.
Yes, I read that and its vague, where is the law and paragraph.
Also, that Wikipedia article does not include my country. It includes: US, UK, India, Germany.

Why people get angry instead of just admitting "Yeah, I guess I can't pin-point out the exact law".
CFC is not a LAW its a recomendation from the OECD to its member countries

here
Tax, Designing Effective Controlled Foreign Company Rules, Action 3 - 2015 Final Report - en
 

darkster

Trusted Member
Business Angel
Mentor Group
Commercial Service
OP is joking with people here or as someone already said trolling for some reason.
 

OffCap

Active Member
Let's say you register two companies:

1. Company A in Caymans or another 0% tax jurisdiction that you are sole beneficiary of.
2. Company B in your local country that you are sole beneficiary of.
3. Offshore bank account for Company A.
4. Local bank account for Company B.

Your local Company B "buys" services or patents from the offshore Company A, showing losses or reporting 0$ profit and what not.

Then Company A later "loans" local Company B money and you still don't pay profit for it since it is a loan.

Ok, so let's say this gets reported by CRS. So what? Technically it is a legal structure.

Kind of like a simplified Dutch-Irish sandwich.

Criticisms?
No, your assessment is inaccurate but not illogical, it was what I figured too before I started doing international structuring.

There's a specific set of rules to prevent this (contrary to comments here CFC rules likely have nothing to do with this particular structure in many cases, in some cases yes, but often no). The specific set of rules that apply to this are called Transfer Pricing rules, which concern cross border non-arm's length transactions and essentially state that you must deal at fair market value when engaging in related party cross border transactions. In other words Company A would need to genuinely provide value equivalent to what is being provided to Company B if an unrelated third party was providing the same good/service.

Now, as for the "simplified Dutch Sandwich", again, this represents a misunderstanding of what a Dutch sandwich is how and why it works.

A Dutch sandwich when they were using it was a form of treaty shopping designed to essentially get around a variety of the withholding tax rules. Increasingly there are anti-treaty shopping provisions to help avoid some of this though it depends where you're operating in the world.

What you're describing will vary dramatically in how it is treated around the world but let's look at it from two different perspectives just for simplicity the two I'll take are US rules and Canadian rules.

Under US rules the first thing that would happen is whatever company B paid to company A would be subject to transfer pricing rules. This would mean you'd have to start off by doing a transfer pricing study to see what the fair market value would be for the services, IP, etc. being provided. This would need to be documented and reported to the government and if it was found you priced it unfairly this would be considered transfer mispricing and you'd be subject to fines on the difference of up to 400% of what you'd have needed to pay originally.

Next, once the money got to the foreign company it would now be subject to the new GILTI tax introduced in the Trump Tax reforms that started last year (prior to last year you'd have only needed to worry about Subpart F and quite likely could have kept the money offshore (there were some cases where they'd have got you on Subpart F so you'd have wanted to do some fancy things, which is what Apple, Microsoft, etc. would do) but they've mostly ended this with GILTI unless you had physical real assets in the foreign country). This would mean you'd be forced to bring that money back to the US and be taxed on it (the calculations of how this work are complicated you could potentially end up paying as little as 10.5% tax but you would pay tax for sure.

At this point there's no value in lending the money back to the onshore company but let's say you did lend money back to the onshore company. If you were to do so then you'd need to do so again according to transfer pricing standards doing another transfer pricing study to determine fair market pricing for the loan and charge interest to your own company and if you didn't repay the loan the loan would be considered income to the onshore company and taxed. The interest from the loan would be subject to withholding tax at the US side at a rate of 30% and then the income when received in say Cayman would again be subject to GILTI tax.

Bottom line, horrible situation.

Looking at it from a Canadian tax perspective is slightly though not much better.

Once again you need a transfer pricing study, the transfer pricing needs to be reported and you can be fined for transfer mispricing.

In this case if the income was paid for example for royalties or something similar then it would be subject to something called FAPI, which applies to passive income earned by a foreign controlled foreign affiliate (the Canadian term for CFC) so it would be taxed in Canada as though brought back. If you managed to characterize it as say services then it wouldn't be subject to FAPI so that's good you've got money in Cayman.

Now, at this stage you could loan it but that would be stupid. The loan would be subject to another transfer pricing study, interest would need to be paid, the interest would be subject to withholding in Canada and then it would be taxed as FAPI income in Cayman. The better way to do it would be you could qualify to repatriate those dividends to Canada tax free under what's called the Exempt Surplus rules and keep them in the Canadian company IF instead of having those two companies owned independently Company A was owned by Company B. You could then use that money to invest or whatever and it would be taxable locally accordingly. You could of course simply spend it so long as you're not spending it on personal expenses.

Those are two examples, every major developed country has similar rules that would play out in various permutations but that's the gist of it.
 

OffCap

Active Member
The main (but not only) problem is CFC rules. In most countries Company A will be viewed as a local company by the tax authorities, since it is fully controlled from the local country.

Some backward countries still haven't jumped on the CFC wagon, may want to check there.
This is inaccurate.

CFC rules are NOT what you're describing. What you're describing are management and control rules. There are also CFC rules but they are different they are what's called Anti-deferral rules.
 

OffCap

Active Member
CFC? Chlorofluorocarbon?

What are these CFC rules? What is CFC?

If it won't work for me, why does it work for Apple, Google and others? They are doing it somehow with the whole Ireland Dutch thing.
Ok, takes too long to explain the tax structure of each of those because they each use different structures so I'll give a brief overview of what Apple does so you can understand.

First, virtually ALL major companies do apply transfer pricing in some regard to shift income. They also often use what are called Advanced Pricing Agreements, which means they've talked to the tax department in advance and agreed to fair pricing so they know they won't get into issues in the future.

In the case of Apple they actually pay a lot of tax in the US (btw what I'm about to describe is the pre-2018 tax structure because a lot changed, as I mentioned in my previous post to your original post GILTI tax has changed the game and Apple essentially paid a small fee to bring all their money back this past year, they've also recently relocated from Ireland to Jersey among other things). What they have done historically is keep their international tax very low.

The way they do this is primarily through what's called a Cost Sharing Agreement. One of their subsidiaries (until recently an Irish registered but not resident company called Apple Operations International and another called Apple Sales International) would paid for a certain percentage of the Apple R&D budget in order to have access to the rights to distribute those products through a certain portion of the world. The advanced pricing agreement with the IRS stipulated that the foreign company paid 60% of the total R&D costs (as you can imagine this constituted billions of dollars) to Apple Inc in the US. Apple Inc in the US realized these payments as income and paid US tax on them. However, for this the foreign company gained exclusive distribution rights to the Apple products everywhere except the Americas (Apple obviously argued this constituted 60% of the world and hence paying 60% of the costs). They were then able to distribute to Europe, Africa, Asia, and Oceania and gain the profits from those sales (the transactions there are quite complex so I won't go into them right now).

These profits came back to Ireland at essentially zero tax. They achieved this (even though Ireland has a 12.5% tax rate) because these two companies were Irish registered but not Irish resident. How this works is Ireland and the US have a mismatch on tax residency rules. The US law states a company is tax resident in the US if it is registered in the US (it's one of the few developed countries that doesn't have management and control rules). Ireland on the other hand says a company is Irish tax resident if it is managed and controlled from Ireland. So they registered the companies in Ireland but ran them from California. When the Irish tax authorities would come they would tell them "this isn't an Irish tax resident company it's managed and controlled from the US". When the US tax authorities would come they'd say "this isn't a US tax resident company it's registered in Ireland" and they declared tax residency nowhere for a period of about 30 years.

Now, there's a whole bunch of other nuances of how they'd avoid the US Subpart F (CFC rules) using something called the same country exception, the look through rule, and the check the box rules but that's beyond the scope I'm willing to explain here.

Ireland has since closed this gap (hence why Apple relocated to Jersey) and the US has since closed most of the Subpart F gaps by introducing GILTI so things are quite different going forward.
 

OffCap

Active Member
The taxman will say where is the management and control taking place as that is where the company will be taxed. Where the company is incorporated or who the beneficiary is matters not in 2019. You need to examine your CFC laws - if they exist, otherwise I can tell you failure is always the best teacher in life :(.
This isn't necessarily correct.

As mentioned first CFC rules and management and control (more accurately corporate residency rules) aren't the same thing so let's get terminology straight here.

Anytime you're doing any sort of international tax planning you must consider:

1. Corporate tax residency rules
2. Local source income rules
3. CFC rules

Depending on the nature of the transactions you might have to consider others as well.

About 70-80% of countries in the world somehow use Management and Control as one of the standards for determining corporate tax residency. The US is a notable exception but exceptions are fairly common in eastern Europe for example.

The only three countries who broadly applied a management and control only standard were Ireland (since more or less ended), Gibraltar, and Cyprus (those two still have it). Virtually all IBC regimes are essentially a slight variation on this where they argue the IBC is not tax resident if it doesn't do business with locals.

HOWEVER, it is not accurate to say that where a company is incorporated and who the beneficial owner is don't matter, they absolutely matter. For most of the world they apply BOTH a management and control standard AND a place of registration standard meaning for example every company formed in Canada is Canadian tax resident AND every company managed and controlled in Canada is Canadian tax resident. This goes for almost every country in Europe, Australia, New Zealand, Singapore, HK, Japan, etc.

The beneficial ownership matters because it determines whether CFC rules apply and in rare occasions (namely Australia) it also is a factor in determining tax residency (Australia has the toughest corporate tax residency rules in the world).

If you're not examining any of the 3 things I mentioned above you could potentially end up screwed. A lot of people mistakenly lump them together or confuse them etc. but they are each separate rules and must all be considered.
 

OffCap

Active Member
CFC stands for controlled foreign corporation and it's the exchange of information between country A and B
NO! CFC does stand for Controlled Foreign Company. It is nothing to do with exchange of information between country A and country B.

CFC are rules that state if a foreign company owned by locals meets certain standards and the income meets certain standards they will force you to pay tax on that money as though you'd brought it back to your home country whether you did so or not. It's what's called an Anti-Deferral regime. The reason for this is because companies like Apple would make money abroad and rather than bringing it back would just leave it there being able to grow it, essentially taking a tax free loan from the IRS. Think of it like a giant 401K (or comparable tax deferred retirement savings plan).

Exchange of information between countries takes place via:

- DTAs (Double Tax Agreements)
- TIEAs (Tax Information Exchange Agreements)
- Convention on Mutual Administrative Assistance in Tax Matters
- AEOI/CRS (Automatic Exchange of Information/Common Reporting Standard)
- FATCA (Foreign Account Tax Compliance Act)
 

OffCap

Active Member
I don't want to reveal this. But can you answer which are international CFC laws? Are they mandated by OECD ,EU, whom?
CFC rules aren't international.

In fact aside from exchange of information rules none of the rules we're talking about are international they are domestic.

There's something called BEPS the Base Erosion Profit Shifting Action Plan developed by the OCED. BEPS is not law, it is a set of recommendations and OECD members aren't required to implement them nor are they implemented in a standardized way across OCED members but there is international pressure among member nations for nations to adopt standards similar to these and so even non-OECD members are moving in that direction.

The EU also has rules and is applying pressure for example we've seen Bulgaria and Belgium implement CFC rules, which they didn't have before due to EU requirements, though each country's CFC rules vary radically.
 

OffCap

Active Member
CFC is not a LAW its a recomendation from the OECD to its member countries

here
Tax, Designing Effective Controlled Foreign Company Rules, Action 3 - 2015 Final Report - en
NO, this is not accurate.

CFC are a type of laws that many countries around the world have. They are local rules and you need to look at them on a country by country basis.

BEPS is a set of recommendations for nations (likewise there's an OECD standard treaty template that is used in most tax treaties around the world). Part of BEPS are recommendations on how to improve CFC rules and we've seen a refinement of those rules across the world probably first and most notably Spain who implemented before BEPS was completed and fully released and many others are following suit.
 

Martin Everson

Offshore Consultant
Business Angel
@<<snippet>> No one is going to spend time reading half a dozen long replies in a row from same person on same thread. I am sure you are making some important points but its all lost and too long to read :rolleyes:.
 

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